AvalonBay, Equity Residential Join to Buy Lehman’s Archstone

By Michael Aneiro

In a big deal for the REIT market, the estate of Lehman Brothers has agreed to sell apartment real estate firm Archstone, to onetime rivals AvalonBay (AVB) and Equity Residential (EQR) for $6.5 billion in cash and equity.

Here’s the New York Times’s story on the deal, courtesy of reporter Michael J. de la Merced:

The sale will dispose of the Lehman estate’s single biggest asset as it continues efforts to wind itself down and pay off the firm’s legions of creditors. And it will end the estate’s plans to take Archstone public, which had been expected to raise $3.45 billion in an offering on the New York Stock Exchange.

While the acquisition of Archstone by Lehman came just as the housing market was slipping from its lofty peak, its sale follows a recovery from the market’s lows. Residential apartment values have surpassed their 2007 peak, and occupancy rates are strong. Still, the market for rental apartments has taken a breather.

Even with the collapse of its Wall Street parent, Archstone has been held in high regard among investors and analysts for the high quality of its properties and the abilities of its management team. The company, based in Englewood, Colo., owns or has a stake in 181 developments with 57,948 apartment units, as of Sept. 30. Its apartments are largely in metropolitan areas in the Northeast, California and southeast Florida.

AVB shares are up $3.86 Tuesday, or 3%, to $132.86, while EQR shares were also up $1.41 or 2.59% to $55.86. Imperial Capital analysts weigh in on the deal Tuesday, saying it will increase AVB’s and EQR’s exposure to the Washington DC area and California,while holding their respective price targets at $140 and $60:

The $2.8bn combined planned public equity issuance will likely weigh on the stocks in the near term and the Lehman bankruptcy estate’s holding of 9.8% (~$2bn) of EQR and 13.2% (~$1.9bn) of AVB following the deal, locked up until 4/26/13, will represent a substantial overhang on both those stocks, in our view.

In our view, the overall valuation of ASN, 5% cap rate, 4.7% after fees and $367,000 per unit, is reasonable and close to the implied cap rates where EQR and AVB are currently trading. The valuation of ASN is consistent with our estimation of the valuation implied by the earlier agreement in May 2012 between EQR and Lehman regarding an option to buy a 26.5% interest in ASN.

We regard Lehman’s willingness to sell ahead of the proposed $3.5bn ASN IPO as signaling uncertainties about the strength of the IPO market and risks related to the Fiscal Cliff.